The following reflects the general views of our Treasury & Investment Office (T&IO) and should not be taken as a recommendation or advice as how any specific market is likely to perform.
These views are as at the end of September 2023.
The value of investments can go down as well as up. Investors could get back less than they put in.
Please remember that past performance is not a reliable indication of the future performance.
The prospect of higher for longer interest rates was a significant drag on financial markets. While inflationary pressures generally continued to ease and it appeared increasingly likely that the current rate-hiking cycle was at, or close to, the peak, investors worried that central banks would keep interest rates elevated for a prolonged period. Central banks’ determination to bring inflation under control with restrictive policies weighed heavily on government bond markets. The US 10-year Treasury yield climbed to the highest level since 2007. Concerns about the US fiscal position and growing debt levels, not to mention a credit downgrade by ratings agency Fitch, also dented investor appetite for US Treasuries. German and Japanese government bond prices declined too, while UK gilts were slightly more resilient.
The selloff in the bond market spilled over to equity markets. The FTSE World Index dropped 3.4%, reversing some of its gains since the start of the year. The S&P 500 Index fell 3.3%, the stockmarket’s first negative quarter in 12 months, but it remains in positive territory for the year to date. European stockmarkets, notably those in France and Germany, also had a weak quarter, amid worries that the region’s economy might enter a recession. The UK was one of the more resilient markets, with the FTSE 100 Index gaining 2.2%. Asia Pacific (ex Japan) and Emerging Market equities also outperformed the broad global market.
The UK stockmarket ended with a modest gain. UK multinationals benefited from the boost to their overseas revenues from a bout of sterling weakness. This reflected the flat-lining domestic economy, the Bank of England’s decision to hold interest rates at 5.25% in September, and a strong US dollar. The currency move, together with rising oil prices, raised concerns about the inflation outlook, and the implications for rates staying higher for longer.
In the US, investors were encouraged by lower inflation and excited about developments in artificial intelligence, but the hawkishness of the Federal Reserve led share prices to reverse course. Markets fell sharply in September, leaving them substantially down for the quarter.
European equities fell amid concerns about the economic outlook and soaring government bond yields. The European Central Bank hiked interest rates to a record 4.0%. Data indicated that activity was slowing, notably in Germany and France, raising the prospect of a recession.
The Japanese stockmarket was one of the best performing stockmarkets globally.
UK government bonds (gilts) marginally declined, although they fared better than other core sovereign debt such as US government bonds and German government bonds. A modest support for gilts came from signs that UK inflation had started to ease, meaning investors cooled expectations of interest rate hikes from the Bank of England.
The performance of global bond markets was poor once again, as investors weighed the possibility of central banks pushing out the timing of interest rate cuts. As a result, bond yields stayed elevated: yields on US government bonds and German government bonds rose more than on UK government gilts.
UK corporate bonds were stronger compared to the previous period and versus regional rivals, boosted by broadly flat government bond yields and some tightening of credit spreads.
Economic headwinds and the outlook for interest rates continue to drive real estate valuations. Following a relatively stable period from March to May 2023, capital values for All UK commercial property are declining again. According to property consultant CBRE, prices fell by 1.0% for the three months to August (latest date for which data is available). Performance has been most challenging in the office sector. However, the prices of modern offices in strong locations with sustainability credentials, are the most resilient. Values in the retail sector also fell recently, albeit more modestly. In contrast, the fortunes of the Industrial sector have proved more favourable, with capital values rising modestly. Demand for well-located efficient logistics properties to fulfil delivery requirements remains healthy.